Business trust denied section 501(c)(3) exemption

Plain-English summary

A business trust sought section 501(c)(3) status for arrangements involving related companies, credit, debt, insurance, fictitious names, and purported tax-free financing. Its trust document authorized stock and distributions to stockholders, and its application described no charitable or educational activities. The IRS concluded that the structure allowed private inurement to trustees and shareholders and that its transactions served related private businesses and creditors. The trust also could not obtain exemption through a previously exempt corporation that had been automatically revoked and later ceased to exist in its original state. After the trust did not protest the proposed adverse determination, the IRS issued a final denial of section 501(c)(3) status.

Ruling snapshot

• Question: Does the business trust qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 2015-9

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: January 26, 2016

Release Number: 201617011
Release Date: 4/22/2016
UIL Code: 501.03-03
          501.32-00
          501.33-00
          501.35-00
          501.36-00
          501.02-00

Employer ID number:

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

Dear                 :

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: November 25, 2015

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:                                  UIL:

B = Trustee                              501.03-03
C = Trustee                              501.32-00
D = Business Trust                       501.33-00
L = Business Trust                       501.35-00
M = Unincorporated Association           501.36-00
N = For-profit LLC                       533.02-00

O = For-profit LLC

P = 501(c)(3) organization
Q = For-profit corporation
R = Fictitious Name

S = State

T = District

X = Business Trust

Y = Title

Z = Business Trust

e = Date

f = Date

g = Date

h = EIN

j = Date

k = Dollar amount

u = Date

v = Date

w = Date

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Dear                 :

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t
qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion.
Please keep it for your records.

Issues

• Do you qualify for tax exemption under section 501(c)(3) of the Code? No, for the reasons described
  below.

• Do you meet the organizational test under section 501(c)(3) of the Code? No, for the reasons
  described below.

• Do you meet the operational test under section 501(c)(3) of the Code? No, for the reasons described
  below.

Facts

You registered in state S as a foreign business trust on date e. You amended your business name from L to Z on
date u and to your current name, X, on date f.

The purposes for which you were formed as stated in your business trust document are:

To make secured credit deposits at any banking institution in the form of a pre-paid insurance policy and
to move substantial credits to each subsidiary or subdivision(s) under its Parent umbrella. This trust is
not classified under any specific corporate structure, thus, covering a multitude of different structures,
representing the future maturity of this policy and a maximum bid on tax exempt contributions. This
trust is derived from the off the records conversion of the Non-Profit which converted into a United
States Limited Liability Company. The Dead status of the Domestic Non-Profit Corporation created a
free and clear Title of interest and an insurance policy Now Due and owing. Credit may be extended
from this policy to make substantial investments into various (joint) ventures and contributions to this
International Monetary Fund are virtually unlimited, as with the PAR value revolving around the overall
outstanding share credits; i.e. sufficient collateral. The Business Detail Report and Dunn’s Report shall
be substantial for this Certificate of Deposit, drawing its own Preferred interest, now the Authorized
Securities Broker Dealer, Account(s) Manager and Clearinghouse for unsecured Debt for Q. This
Company represents the private side to the same and deals in Accounts Receivables; Separate Trading of
Registered Interest on Principal Securities (STRIPS) and Accounts Payable; Treasury Inflation Protected
Securities or (TIPS). The same is unaffected by inflation/deflation overhauls, recession proof and
stabilizes United States Currency.

Your business trust document states you issued and authorized shares of stock.

You filed a fictitious name, R, with state S on date g.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

You also filed Trade names under X for your trustees, B and C.
On date v, you filed a limited liability company document with T.

Your application Form 1023 indicates that you are a corporation, a limited liability company, an unincorporated
association, and a trust. You state that you engage in business transactions, through special licensing
arrangements, with internal companies. These companies are held and managed by the fictitious name
registration of M, from which you are Y. However, you are not directly implicated in the arrangement and
therefore, do not rely on public support or support from the private sector in terms of tax reporting
requirements.

You state that on date w, P was incorporated under the non-profit law of state S using the Employer
Identification Number of h. P applied for and was granted exemption under IRC section 501(c)(3) effective the
date of incorporation. However, the exemption was automatically revoked effective May 15, 2010, due to
failure to file Forms 990 for three consecutive years. On date j, P converted out of the existence of state S to a
foreign for-profit limited liability company under the laws of T under the name Z.

You also state that there can be no tax provisions on the foreign limited liability company in the state S, with
principal registration occurring in T. Therefore, there can be no tax provisions on this foreign limited liability
company in T, with unlicensed foreign name registration in state S.

You state that special licensing arrangements between you and M, a fictitious entity, operate independently of
any regulated bylaws under the jurisdiction of state S. The special licensing arrangement operates as a separate
Board of Governors by and through M as an unincorporated nonprofit association that will provide funding to
you by and through the fictitious name registration M. You state M has raised the necessary funding by
mortgaging Internal Revenue Service cancellation of debt to establish pre-paid credit on a perpetual 99-year
lease for up-front “CASH” advances and you have committed to receiving direct financing from M’s
arrangement. Your trustees, B and C, have registered as Trade-names from which you are Y. Such governing
instruments are not subject to public inspection for purposes of this application and thereby qualifying you as a
private foundation by virtue of trade-name registrations of B and C and the unincorporated nonprofit association
and not you directly. You will rely on the Internal Revenue Service to determine eligibility as a private
foundation or public charity.

You state the Uniform Commercial Code (“UCC”) financing statement filing that established the “Bank” and
“open” accounts will verify funds on deposit and the transferability of tax credits to your 12-digit certificate
account. No money down transactions will enable you to establish bank accounts with no Employer’s
Identification Number (EIN) or Federal Reserve Notes. However, no account will be open at a regular banking
institution without these foreign source funds, as the same will imply taxation of your foreign trust entity.
Therefore, the submitting Debtor on Internal Revenue Service cancellation of debt, which is N may issue
“payment” of obligations from its CLOSED account. By definition, a CLOSED account remains “open” for all
setoffs and adjustments by virtue of this Special Licensing Arrangement. The accounts on this instrument are
Fed wired through the United States Federal Reserve banking system (“FED”) and the Bureau of the Public
Debt (Department of the Treasury) for guaranteed on the spot financing by cancellation of the public debt.
Payable accounts in the commercial registry of the UCC financing statement are private and do not route to the
FED and the Bureau of the Public Debt to keep internal accounting ledgers balanced to a perpetual zero
balance. You cannot be a direct party to this action because you maintain the value of state property held in
trust as permanent intrinsic value; via N, Debtor for the state of S, now on Exempt transfer to O.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


You state through separate trading of the fictitious name registration of M from which you are Y is the
submitting Creditor on Internal Revenue Service form(s) 1096 and 1099-C for cancellation of debt. The
acceptance of the cancellation of debt creates pre-paid credit for a National LIFE insurance policy for you and B
and C, and all companies held and managed by this Special Licensing Arrangement; now NON-
NEGOTIABLE. Transactions will be deemed “NEGOTIABLE” as long as these brokerages remain in-house.

You state the trade-name registrations were subsequently registered by you to become beneficiaries as the basis
for this Special Licensing Arrangement and a National LIFE Insurance Policy. This pre-paid credit is backed
by real property and multiple contracts for rights to distribute “debt” to private companies held and managed by
this Special Licensing Arrangement. These private companies will maintain liability insurance as “publicly”
traded companies in the acceptance of credit distributed as “debt” under this Special Licensing Arrangement for
Valuable Consideration. Providing liability insurance on the unsecured use of Federal Reserve Notes in dollar
for dollar increments is pre-qualification of EXEMPT status through you. Real property land contracts may
signify the amount of the loan(s) made to each held and managed company of this arrangement. Each land
contract has been signed and accepted by state S and its Alien Land registration division. These “interest”
payments will benefit B and C as insurance premiums and dividends on internal lease(s), rents and utilities.

You later submitted additional information and a copy of a “money order” in the amount of k payable to B and
C from you and M. You then submitted a “cashier’s check” in the amount of k payable to the U. S. Treasury
made out by D which is a business trust formed in T. You stated that the IRS must debit the check (certificate
account) of the submitting debtor to protect pre-paid credit from direct and indirect taxation (Double Rollovers)
and to eliminate any conflicts of interest of the Internal Revenue Code and its taxing provisions.

You requested a reinstatement of tax exemption under IRC section 501(c)(3) via P’s determination letter which
will place the reorganization plan stamp on the fictitious name registration of the Association, M, automatically
reinstating the EXEMPT status in your favor.

Your budget is zero for all years. You said that through separate trading of the fictitious name registration of
M, you are the submitting creditor on IRS form(s) 1096 and 1099-C for the cancellation of debt and therefore,
you will always have a zero balance since there is no money.

Law

Section 501(c)(3) of the Internal Revenue Code exempts from federal income tax corporations, and any
community chest, fund, or foundation, organized and operated exclusively for, charitable, scientific, or testing
for public safety, among other purposes. It expressly forbids the inurement of net earnings to the benefit of a
private shareholder or individual.

Treasury Regulation section 1.501(a)-1(c) provides that the terms “private shareholder or individual” in section
501 refer to persons having a personal and private interest in the activities of the organization.

Treas. Reg. section 1.501(c)(3)-1(a)(1) provides that an organization that fails either the organizational test or
the operational test is not exempt under section 501(c)(3) of the Code.

Treas. Reg. section 1.501(c)(3)–1(c)(1) provides that an organization is operated exclusively for exempt
purposes only if it engages primarily in activities which accomplish one or more exempt purposes specified in

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

section 501(c)(3). It is not so operated if more than an insubstantial part of its activities do not further those
purposes.

Treas. Reg. section 1.501(c)(3)–1(c)(2) provides that an organization is not operated exclusively for exempt
purposes if its net earnings inure to the benefit of private individuals.

Treas. Reg. section 1.501(c)(3)–1(d)(1)(ii) states that to be charitable, an organization must serve a public rather
than a private interest. The organization must demonstrate that it is not organized or operated for the benefit of
private interests such as designated individuals, the creator or his family, shareholders of the organization, or
persons controlled directly or indirectly by such private interests. The private benefit restriction is not limited to
benefits provided to insiders. Rather, the restriction applies to benefits provided to any individual, whether or
not the individual is in a position to control or influence the organization. The private benefit restriction
operates against all parties who receive a benefit not accorded the public as a whole.

Section 4.01 of Revenue Procedure 2015-9 states that “a favorable determination letter or ruling will be issued
to an organization only if its application and supporting documents establish that it meets the particular
requirements of the section under which exemption from federal income tax is claimed.”

Section 4.03 of Revenue Procedure 2015-9 states that “exempt status may be recognized in advance of the
organization’s operations if the proposed activities are described in sufficient detail to permit a conclusion that
the organization will clearly meet the particular requirements for exemption pursuant to the section of the Code
under which exemption is claimed.” Additionally, “where the organization cannot demonstrate to the
satisfaction of the Service that it qualifies for exemption pursuant to the section of the Code under which
exemption is claimed, the Service will generally issue a proposed adverse determination letter.”

An organization is not operated exclusively for charitable purposes, and thus will not qualify for exemption
under section 501(c)(3) of the Code, if it has a single non-charitable purpose that is substantial in nature. This is
true regardless of the number or importance of the organization's charitable purposes. See Better Business
Bureau of Washington, D. C., Inc. v. United States, 326 U.S. 279 (1945), which held activities that were in part
aimed at promoting the prosperity and standing of the business community were held to serve a substantial non-
exempt purpose.

In Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958), the court held that an applicant for tax exempt status
under section 501(c)(3) has the burden of showing it “comes squarely within the terms of the laws conferring
the benefit sought.”

In American Science Foundation v. Commissioner, T.C. Memo 1986-556, the Court held that an organization
was not eligible for exemption because it failed to provide sufficient information to permit the conclusion that
its activities would be exclusively in furtherance of exempt purposes.

In The Church of the Living Tree v. Commissioner, T.C. Memo 1996-291 (1996), the Tax Court upheld the

Service’s determination that the organization, whose secondary purpose was promotion of the (hand)
papermaking industry, was not described in section 501(c)(3) of the Code. The organization also provided rent-
free facilities to the founder, although the founder received no compensation for his work with the organization.
The Service had determined that promotion of the papermaking industry was a substantial non-exempt purpose
and that the organization provided private benefit to the founder. The court ruled that the organization had not
carried its burden of proof to show the Service’s determination was erroneous.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Application of law

Section 501(c)(3) of the Code and Treas. Reg. section 1.501(c)(3)–1(a)(1) set forth two main tests for an
organization to be recognized as exempt. An organization must be both organized and operated exclusively for
purposes described in section 501(c)(3). Based on the information you provided in your application and
supporting documentation, we conclude that you fail both tests.

You are formed as a business trust and the trust document authorizes you to issue capital stock and to make
distributions to stockholders. As a result your net earnings are set to inure to private individuals. The holding
of stock by any private individual that entitles that individual to any part of your assets or income constitutes
inurement prohibited under section 501(c)(3) of the Code. Because your organizing documents are structured in
this manner you do not meet the organizational test.

You do not meet the requirements of Treas. Reg. section 1.501(c)(3)–1(d)(1)(ii) because you serve private
interests, namely, the business interests involving financial transactions encouraging the distribution of credit as
“debt” or liability insurance. Also, because you are operating for commercial purposes in furtherance of
private, rather than public, purposes, you do not meet the operational test (Treas. Reg. section 1.501(c)(3)–
1(a)(1)) and therefore do not qualify for exemption under section 501(c)(3) of the Code.

You do not meet the requirements of Treas. Reg. section 1.501(c)(3)–1(c)(1) because more than an insubstantial
amount of your activities are furthering non-exempt purposes. Your operations benefit private parties, namely,
private businesses or creditors. You are similar to the organization in Better Business Bureau of Washington,
D. C., Inc. v. United States, in that you have a substantial purpose to help you and your related business entities
and creditors to become tax free entities, an activity which is not in furtherance of any exempt purpose within
the meaning of section 501(c)(3) of the Code.

In accordance with Treas. Reg. section 1.501(c)(3)–1(c)(2), you are not operated exclusively for exempt
purposes because your net earnings inure to the benefit of private individuals. You are conducting business
transactions as a for-profit business and to ensure you, your related for-profit businesses, and your creditors are
not liable for taxes. See also The Church of the Living Tree v. Commissioner.

You do not provide sufficient documentation to support that you conduct or plan to conduct activities described
in section 501(c)(3) of the Code, as stated in Nelson v. Commissioner. Revenue Procedure 2015-9 maintains
that a favorable determination letter will not be issued to an organization unless its application and supporting
documents establish that it meets the particular requirements for the section under which it claims tax
exemption. Your application does not establish that you meet the particular requirements for exemption under
section 501(c)(3) of the Code.

Exempt status can be recognized in advance of operations if proposed operations can be described in sufficient
detail to permit a conclusion that the organization will clearly meet the requirements of section 501(c)(3) of the
Code (American Science Foundation v. Commissioner). You have not clearly established you meet these
requirements.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Your position

You state because you carry a zero balance account, therefore, you should be granted exemption under section
501(c)(3) of the Code. If P’s tax exemption is reinstated, it will automatically give you the exemption status
under section 501(c)(3).

Our response to your position

Your activities promote business transactions of credits, debt, or liability insurance to each privately held and
managed company of the Special Licensing Arrangement between you and related entities. Nothing in your
application described charitable or educational activities, only why you should not be liable for tax provisions.

You were also formed as a for-profit business trust with shareholders. You are not formed as a non-profit
public benefit corporation. The direct and primary beneficiaries would be your shareholders and your related
business entities. For this reason, you are more than insubstantially serving private interests. The existence of
one non-charitable purpose that is substantial in nature is cause for denial of exemption. Furthermore, an
organization will not qualify for exemption if it is operated for a mixture of exempt and non-exempt purposes.
You are only operating for non-exempt purposes.

In addition, P no longer has a legal standing for exemption since it converted out from a non-profit public
benefit corporation incorporated in state S. P is no longer in existence as a corporation in state S. In fact, P’s
status is “dead” with state S. P is also auto-revoked by the Internal Revenue Service for not filing Forms 990
for three consecutive years. Exempt status may not be transferred to another corporation, especially to the
“dead” corporation; therefore, you will not be granted exemption through the reinstatement of tax exemption of
P.

Conclusion

Based on the facts and circumstances presented, you do not qualify for recognition of exemption from federal
income tax as an organization described in section 501(c)(3) of the Code. You are not organized and operated
exclusively for exempt purposes as set forth in section 501(c)(3).

Your net earnings inure to the benefit of your trustees, who are private individuals.

As a result, we conclude that you are not operated exclusively for public rather than private purposes. We
conclude based on the stated facts that you do not qualify for tax exemption because more than an insubstantial
part of your activities is not in furtherance of exempt purposes.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W



You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W